An Open Letter to Everyone Under Age 30

There's an old story about a guy taking a smoke break with his non-smoking colleague.

"How long have you been smoking for?" the colleague asks.

"Thirty years," says the smoker.

"Thirty years!" marvels the co-worker. "That costs so much money. At a pack a day, you're spending $1,900 a year. Had you instead invested that money at an 8% return for the last 30 years, you'd have $250,000 in the bank today. That's enough to buy a Ferrari."

The smoker looked puzzled. "Do you smoke?" he asked his co-worker.

"No."

"So where is your Ferrari?"

When you think about money and saving, stop, look around, and ask yourself: Where are all the Ferraris?

Sure, not everyone with $250,000 should buy a Ferrari, or even wants one. But we know the rough financial position of average Americans, and it isn't within hailing distance of Ferraris. Less than 60% of Americans are saving anything, and two-thirds of those who are have less than $25,000 salted away, according to ConvergEx. Almost half of Americans couldn't come up with $2,000 in the next month if they had to, accord to the National Bureau of Economic Research. According to Nielsen Claritas, Americans age 55 to 64 have a median net worth of $180,000 -- less than they'll likely need for health care spending alone during retirement.

How can so many Americans be so poor if accumulating a lot of money over time is as simple as saving a few dollars a day?

Because most people don't take advantage of what you Millennials have in spades: Time.

You have time on your side. Decades in front of you to save and invest. It's the biggest financial asset you own today, and you're probably not even aware of it. The single best thing you can do for your finances is to realize how valuable it is.

I know you, Millennials. When you think about building money for retirement, you focus on earning more money later in your career. And why not? You'll likely earn far more in your 40s and 50s than in your 20s and 30s. Waiting until you have a nice fat paycheck before you save money makes sense, right?

Wrong.

The average American age 16 to 24 earns $444 a week, according to the Bureau of Labor Statistics. Those age 25 to 34 earn $707 a week. Workers age 45 to 54 earn $878 a week. And those age 55 to 64 earn about $900 a week.

So, by the time you're in your 50s you can expect to earn about double what you earned in your 20s and 30s. Optimistically.

Compare that to the value of money saved and invested in your 20s and 30s, and we're not in the same ballpark.

For the last 150 years, the S&P 500 has delivered an average annual return of 6.6%, after inflation. During that period, we had nine major wars, 33 recessions, a half dozen financial crises, and an uncountable number of really awful things happen to the economy. Through it all, 6.6% a year is what you averaged. It's the best estimate we have of what stocks will return over the next many decades.

And lucky you, earning a 6.6% return on your savings does nothing short of miracles over time. If you are 20 years old, every dollar you save today will be worth $18.50 by the time you are 65 (and that's adjusted for historical inflation). If you're 30, each dollar saved today will be worth $9.6 by age 65.

Think about that. From the time you are in your 20s and 30s until your 60s, your weekly wages might double. But money saved in your 20s and 30s could very realistically grow tenfold by the time you reach your 60s.

Saving a little bit of money when you are young can be a more efficient way to build wealth than saving a lot when you're older.

I know how ghastly the jobs market is right now, Millennials. And most of you lucky enough to have a job feel as if your paychecks round to zero.

I get it.

But don't overlook the incredible asset you have in time.

Time allows the market to do the heavy-lifting wealth-building for you.

Take advantage of that any way you can. $20 a month. $100 a month. Whatever. Any small amount you save now will likely be more important to your long-term wealth than much larger amounts saved when you're older and earning more money.

This might sound basic and boring, but in 40 years, you will not care what the 200-day moving average is, or how many basis points Treasury yields rose this month, or the short-term forecast of another well-dressed analyst with a charming British accent. I promise. What will matter is whether or not you saved money and invested it for the long haul.

I know you, Millennials. You're spending $5, $10 a day on stupid stuff you probably don't even like while working tirelessly in college and work to boost your future earnings. Once you realize cutting out the former can be as important to your finances as trying to boost the latter, you might find yourself closer to your goals. That's how you leverage your assets. That's how you turn cigarettes into Ferraris.

Good luck.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

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"So where is your Ferrari?" That's a dangerous question that cuts multiple ways. For instance, since you've begun your professional career, do you know how much you've contributed/invested? Do you know what your average annual return is? If you invested through the 2008 crisis, you've likely experienced some substantial losses.

Do you suffer from the Dunning-Kruger effect that you just taught me about? (I would suspect the answer is no, but do you keep track of your own performance?) If you do keep track, have you been able to annualize 6.6% after inflation since inception?

If not, then where is your "Ferrari?" If you have been able to achieve market averaging returns (or better) since inception, you are to be commended and you'll create plenty of future options for yourself.

From my experience, I have contributed/invested since my first job out of college in 1991. I've experienced unsatisfactory returns during the decade beginning in 2000. My returns since inception have been adequate but below 6.6% after inflation during this time period. But the silver lining has been that I've learned to live beneath my means during this time because I've been saving and have restrained (to a healthy degree) my standard of living all the while as my income has increased. That has been invaluable and has more than compensated for my unsatisfactory returns.

And the ultimate benefit could lie in the future. My nest egg has grown more from savings than from investment returns so far, but it has now become substantial. If we enter a more "normalized" period of returns for an extended time, my larger nest egg will benefit to a much greater extent. That is, satisfactory returns with a larger sum completely cover over the minor negative effect of unsatisfactory returns with a smaller sum.

If my future returns work out this way, I'd be happy to toss you the keys to my Ferarri!

Not to worry, Morgan. I know the difference between unrealized losses (caused by volatility) and recoveries of asset values (also caused by volatility). I hope you didn't read any negative tone in my previous comment.

I am so tired of seeing articles saying millennialist "should be investing" and they "aren't taking advantage" of the time they have.

I KNOW how important it is to save and invest now. My friends know, my 19 year old brother knows... WE KNOW.

What we don't know is how exactly were suppose to go about saving and investing. Alright, I saved $200 a month from my paycheck. On top of paying rent, food, living expenses I forced myself to save. Now what? What do I do with it... Do I put it in a savings account for 20 years? a CD? What are all these investment things I can put it in. I understand the concept but what exactly am I supposed to do here. I just learned about the confusing world of 401k's and now I'm trying to put money in there. But where are you expecting me to find all this extra time to teach myself how to invest? Do I find a financial planner? How does that work anyway. I didn't learn any of this in school or college and my parents didn't tell me much about this either. I'm assuming there are many people like myself in the same boat because all my friends are trying to save too.

Assume we understand the importance of investing now but don't know how to go about it exactly. Can you tell me what resources I should be using to better educate myself? That would be more helpful than a lecture on how "I'm not taking advantage of my time now."

It really is that simple, and if you start right off the bat putting 10% into a 401k or IRA it's almost painless. You just have to adjust your lifestyle to make it work. I started saving at 23 at my first job, and almost always contributed the maximum to my 401k. I'm in my early 50's now, and closing in on a $800K account balance.

So many people bring up the recent crash, thinking anyone who was invested in the market lost money. I didn't lose money. Sure the value of our 401k account went down, but then it went back up.

The value dropped about 40% from the start of 2008 to the start of 2009. But had recovered at the start of 2010.

2011 it was 50% higher. 2012 it was double what it was before the crash. And now it is 3.3 times what it was before the crash. Admittedly we are adding to it, but not enough to account for a 230% growth.

Would have done even better if we could have added to the account during the crash.

Simple reason why people are unable to save a few dollars a week. That is because they are spending a few hundred more dollars a week then they bring in. Regardless of their incomes, most of my friends spent beyond their means. Increasing income was just a mean for carrying more debt.

I save what I can, when I can. You'll never catch me investing my savings though. No sir, if I had my way corporate protection laws would be revoked, the federal reserve would be confiscated and placed under government control, and the government would own 51% of the entire market to keep these investor criminals out of america's finances for good.

Alright you can tell I'm a novice here, but is it better to invest my savings in retirement or the stock market, or to pay off my student loan? I am currently a college student and what little I manage to save I've been using to help pay for school so as to decrease how many loans I'll have to take out. Is this a decent strategy or would my money be better utilized in a retirement account or other investment vehicle?

There seems to be 2 typos that may really change the result of the article.

First, Shiller S&P 500 "Real Price", which is inflation adjusted, shows that in the last 150 yrs or so, the average annual return has been 2.5% (again, inflation adjusted).

If you start your count from the 1920s, it's been about 3%, inflation adjusted.

So, the 6.6% you state is Not adjusted for inflation.

Similarly, You say people in their 20s would have saved $18 for every dollar invested by the time they are 65, inflation adjusted. Well, again, that is NOT inflation adjusted. After accounting for inflation, it's about $3.25.

I would have written the article starting with 1950s as my starting point, because all the accounting rules, information dissemination, etc are more realistic estimate than the late 1800s.

When you take, for example, 1950 as your starting point, then you're looking at about 4.5% average annual return, again using Shiller Real price. Of course, if you would take your starting point as 2000, then you'd be losing money now, after including inflation.

4.5% inflation adjusted is still very good, and there are no other common investments out there that even come close.

For those of you who swear by real estate (home buying, the little stuff, I'm not talking about Mr. Big developer stuff), just go look at the Case-shiller index. Value of Houses have remain the same in the last 150 yrs, with some ups and downs along the way.

The reason nobody is rich is because at 4.5% annual rate of return (inflation adjusted) you would need to start off with a huge amount of money at age 20 and every year save thousands of dollars.

Have a wife and kids? Good luck saving any money.

Bankrate has a nice retirement calculator. If you spend now $4000 a month, you'll need short of a couple of millions (inflation adjusted) saved up when you're 65 to keep up with your spending habits. The only reason you might still be able to retire regardless is, hopefully, social security benefits.

Love the article, emailed it out to those I love most. Your comments, though, Morgan. Your comments. Come for the article, stay for the comments.

Sunshine, "invest my savings in retirement or the stock market" - this sentence doesn't exactly make sense. You can invest in stocks for your retirement, yes, but it isn't stocks OR retirement. Most fund that people buy for retirement contain stocks, though most people probably don't realize that. You should read the article Morgan referred the other reader to above.

Also, it depends on your student loan situation. In Canada, the interest on our student loans is tax deductible (and interest rates are near record lows). I'm still in school so I haven't touched my student loan, there are better places for my money for the time being.

Most of the people confused about the stock market, it takes very light reading to understand. Just buy Vanguard products like clockwork (monthly). Canadians, fill your TFSA first, Americans, IRAs.

> is it better to invest my savings in retirement or the stock market, or to pay off my student loan?

sunshine2929, it depends a lot on how bad your student loan interest rate is. When I was in your situation many (many!) years ago, I prioritized paying off my highest rate loans first (making higher payments towards principle, etc.), reasoning that the 8% loan rate was my most expensive debt, and was higher than I could confidently expect from my investments.

Today I'm not sure I'd feel the same way about prioritizing that 8% debt over my ability to earn 8% return on investments, but at the time it seemed prudent.

The only thing I might add is it doesn't have to be an "either-or" question; i.e. your efforts to minimize additional debt and pay off what you already owe is great, but nothing says you couldn't take a little bit of those resources and redirect them into some kind of investment strategy.

Not every stock purchase or CD or bond or 401(k) or savings account or whatever other investment suits you needs to come from a huge sum of money.

i could write a long essay on all the points made in this article, but there are really only three ways to become a successful investor starting young, and it does cut across the political:

1. Always be employed - without this, you cannot keep investing when the market is way down, which is when you make all the returns that make the stock market a worthwhile investment. I was not laid off in 2008 and kept investing and was rewarded, but those I know who were laid off and didn't invest for a year or so will probably never make that back. Buffet is honest when he says he feels like a kid in a candy store during a recession, others from a certain party use the word "liquidation" for getting through a recession, when they pick up assets for very little.

2. Have a mentor you are willing to listen to - I had a nephew when in his twenties I said come to my house once a year, work like a dog on chores for a week, have 2K in cash, and I will match it with 2K and put it into a Roth, and he was keen on Apple and Google back in 2003. He never came over and now finally has a real job, but he would have at least 100k in assets. Please listen to that eccentric uncle or someone who does have assets.

3. Do not smoke or drink, and always have health insurance. This will wreck many families, and the lack of honest debate about this by politicians means you cannot trust any system that is set up.

Until there is clarity on this, no investment strategy can be safe. I know the Fool has many articles on macro trends that are actually positive, but at the micro level, nothing is resolved.

Hi Morgan, It's all in plain sight, if you rally want to look. A young man I work with (22yo) has a financial picture that looks like this. Cell phone plan $100.00/mo, Xbox 360 account $9.99/mo, 2012 Civic (something or other) $389.00, he still lives at home and hasn't graduated college yet but talks all the time about his girlfriends and how much they go out. At present he works part-time for $10.50/hr. I think for them the word necessity has an entirely different meaning. Oh yeah and come to think of it ....he smokes. Financial literacy, forget about it.

Wow these comments, @ diegorgazzi "The only reason you might still be able to retire regardless is, hopefully, social security benefits." I don't know your age, but I know by the time I'm old enough to receive Social Security (I am 22), it will be a much bigger joke than it is today (which is becoming an ever increasing joke)... To all the young ones get as many investment vehicles as you can, diversification rules... I have about 50% in the stock market, not that diverse, but I do love following the market and making my own picks, so it depends on how you feel like investing... Do you do it for safety? Are you a gunslinger looking for the volatile companies? Ask yourself this and a lot more to understand how you would like to invest...

<<So, the 6.6% you state is Not adjusted for inflation Similarly, You say people in their 20s would have saved $18 for every dollar invested by the time they are 65, inflation adjusted. Well, again, that is NOT inflation adjusted. After accounting for inflation, it's about $3.25.>>

Both numbers are adjusted for inflation. I can send you the spreadsheet if you'd like. mhousel@gmail.com.

You have to be very careful when investing for the long haul. What works today may not be working in 20 years. Interest rates and markets go up and down. Companies come and go. So you need to be flexible and diversified. Government rules change over the years which can blind side you. I did a series of EE bonds converted to HH bonds paying a great interest for almost 30 years, with one 30 year roll over. My timing was perfect for retirement. As I approached retirement they changed the rules. You are now no longer allowed to roll them over and I am forced to cash them in as they come do and pay taxes on all the interest the EE bonds earned. Bond ladders were big back in the 70's and conversion to HH was a great retirement vehicle. Not so when retirement came. I have also lost around 50% of the interest I was earning and my pool of bonds is shrinking as I am forced to cash them in year after year as they come due. My taxes are larger also as I was not expecting to be paying Taxes on the HH bonds right now. All that EE bond interest is now being added to my current income. Be ready for changes over the long haul and move when necessary, have at least 4 legs to your retirement stool. You will probably loose one leg along the way.

Morgan, there is a similar story in Mao's Little Red Book, and both stories are bull. Millenials have been placed in positions where deals that earlier generations had taken for granted turned out no longer valid. My son's condo is bankrupt, because too many members cannot afford to pay their condo fees. The one-third of the membership must then carry the burden for the rest of the establishment. The increased condo fees were not predictable at the time of purchase, and the condo units are not saleable. The unaffordability of savings came about because of the financial meltdown, and the subsequent loss of jobs. Additionally, education loans have taken increasing amounts of millenial incomes, which used to be handled by parental subsidy of the entire college experience. You are not just comparing apples and oranges, you are comparing apples to asphalt.

@FooLawson, that's why I said "hopefully", because I know Social Security might not be around in 30 years when it's my turn to retire and yet, people have been able to retire in big part because of it. We may be the generation that never see that happening.

The whole point is, unless you have an extremely high income or an OK income but stay single for many many years (and no wasting money on expensive toys), chances are you'll never reach that $2 or $3 million dollar goal (inflation adjusted) that you need solely based on the stock market taking you there.

Just my two cents. I guess I'll let you know in 30 yrs how I fared, and my middle name is "frugal" ....

What srikli says is good advise. If you don't have the time to research stocks, and I'm talking good companies at reasonable prices, Warren Buffett's advise is to put what ever you can into a low cost Index Fund while paying down your debt. Kill two birds with one stone!

Dollar cost averaging: Sending the same amount of money every month from a bond index fund to buy shares in a stock index fund. Throw in the passage of time with total reinvestment of proceeds. No magic, no mystery. Get started.--Tom Reilly

A couple of years after I graduated from college back in the late 1980's, a wise friend gave me a book titled "The Wealthy Barber: Everyone's Common-Sense Guide to Becoming Financially Independent". I read it, the book is an easy read and it set the foundation for the principles to wealth building. Like Morgan's article above, it discusses saving, investing, etc... and doing so regularly and letting time work to your advantage. If you start young and develop good habits, you'll be set when you are older, probably much sooner than what is now thought of as traditional retirement age. The key really is starting early and letting time work for you. I highly recommend doing so, who wants to rely on the government for their subsistence in later life? I know I'd rather not leave it to the whims of our elected Representatives and Senators.

I feel very blessed and lucky to have had relatives who encouraged me to invest when I was in college. That advice, combined with a bit of bitter cynicism ("Social Security probably won't even exist by the time I retire"), were the things that inspired me to start investing in my early 20's. I put myself through college (AA, BA and Masters). Even in my leanest college years, I invested what I could. I was scared to invest and started with certificates of deposit. After about a year, I talked to a free financial advisor at my bank. He convinced me to move into mutual funds (IRAs that I later converted to Roth IRAs). I bought my first home in California about 6 months after earning my Masters degree; I was still in my 20's. I am now in my early 40's and despite earning a modest income, I have a sizable nest egg. The sacrifices have all been worth it!

Morgan - this article was straight forward and related to my scenario very closely so thank you. I look forward to reading more of your posts.

I'm 28 and I've only recently become more hands on with with my investments. You are 100% right that time is my biggest asset. I work in the mortgage industry and there are a lot of people out there who shouldn't own a home. If people can barely afford a house payment how do they expect to have money left over to invest in a comfortable retirement? Most people I talk to about refinancing or buying a home have kids, car payments, college tuition, credit cards, etc. Now you're talking about investing? You can forget about it because most people simply don't save and are far too lazy to learn about investing.

My mother is 63 and receives social security and a military pension from my late father and still has to work two part-time RETAIL jobs to get by.

No thank you! I'm hoping by the time I'm 60 I'll be mortgage free, have a large IRA distribution each month, and be healthy enough to golf on a regular basis.

Arguing over the annualized return figure (6.6% or otherwise) is meaningless -- the entire premise behind citing the figure in the first place is flawed. Just because the S&P averaged 6.6% over the last 150 years does not mean that it will average 6.6% over the next 150 years.

It could, or we could have a second industrial revolution and stocks could return 10x that amount. Alternatively, the US government could collapse and all financial assets could go to 0.

Taleb makes this point quite well in Fooled by Randomness. Sure, buying US stocks in 1880 would've been great -- but what if you had bought stocks in Imperial Russia instead? Or Argentinian real estate in the early 1900s, when the country was one of the richest in the world? (In both cases, you would've been wiped out and never recovered.)

I totally agree with the larger point in terms of saving and learning to invest at a young age, but historical performance can not be projected onto future returns.

SWEET- Now where can I REALLY get 8% return year over year over year without having to buy $10,000 worth of stocks in 100 different companies.

Our Financial Planner throws that number around every year- we ask him- please go get us that 8% return -not in a month, not in a year, annualized over a decade.

Oh yeah- everyone can point to where it has happened in the PAST- but NOBODY can tell you where those investment are today- over any 7 year period I have yet to beat 2% Even subscribing to Fool newsletters, even with mutual funds. Commentators cherry pick the sweet spot that gives a good number, but over time the odds are against you.

I love the ads touting "Had you bought COKE in the year 19xx you'd be a millionaire, nobody was recommending COKE in that particular year.

I still invest, but I have found the very best surefire way to make money is to work for it, and save some it, and plan retirement on 2% returns...

you can't keep all of the people happy all of the time, but you made a good shot at it.

I look forward to your articles and read this one even though I'm on the wrong side of 50. Thanks to you and MF I am doing okay financially, (I could have a few Ferrari's if I needed them) and my advice to the under 30's is 'pay attention'

It's easy enough to respond to the Ferrari quip: "My Ferrari is in my 401k, Roth IRA, 529, my rental property and the business I'm trying to start. See, I could have a Ferrari, but I'm smart enough to put my money elsewhere."

Thanks for the Spread sheet. I double checked with other sources, and you're right, Dividends make a big difference. Without dividends the ROR is 2.1% (Inflation Adjusted), with dividends it's 6.6%, like you said.

Wow! I've been ignoring dividends for so long, the eye opener here is that it makes a huge difference!

Good Article. Among my peers I've discovered that Financial Wisdom/Intelligence is SEVERELY lacking in the younger crowd. For instance asking someone in their 20's or 30's to explain the difference between simple and compound interest will often get you a deer in the headlights look. Asking the same crowd to calculate the monthly interest charges on the average credit card ($5k @14.95%) will get the same response.

My lawyer and my ex split most of my 1st Ferrari. However, after following TMF for the past 3 years my experiments in investing have turned ~$4.5k into just over $7.5k. If I'd have started with my first real job at 19 who knows where I'd be - more saavy at the least.

Invest wisely AND often is what I wish I had known. That Rainy day account - include cash investing AND 401k/IRA so when the Spiffy Pops come along you can catch those too!

I like your articles Morgan, but you seem to have a fixation with the power of compound interest. Somehow the knowledge of the ancients has been lost in today's world.

"Time allows the market to do the heavy-lifting wealth-building for you."

Time does not make money. Money does not make money. The market does not make money. Only productive activity makes money (or more accurately "value"). When someone extols the virtues of investing all they're doing is advising you to take advantage of (and take a little bit from) the productive activity of others.

But productive activity does not compound. Indeed nothing compounds (for very long).

Einstein is often (mis)quoted for saying the compound interest is the most powerful force in the universe. If he did say such a thing it would have been only for effect. Because nothing in the physical universe compounds. Read Einstein's own theory of relativity.. you won't come across a single exponential function. Heck ask any college kid (the one's this article is directed at) if they encountered even a single exponential function in their intro physics textbooks anywhere.. You won't find any.

The growth of money cannot overtake the growth of production without inflating the money supply. Production does not grow at exponential rates therefore neither can money.. without inflating of course. Yet we pretend it can. (apparently 6.6% for 150 yrs!!!)

Ask yourselves this question - what if every single 20-30 yr old started investing? What if every single 20-30 yr old let the market, or time, or whatever, do the heavy lifting and decided not to do the heavy lifting themselves? After all isn't that the point of investing?.. to increase your accumulation of wealth faster than your actual production of it? What if everyone decided to accumulate wealth faster than they made it? What would happen then?

What if you saved and invested and went to the Ferrari dealer to finally buy your Ferrari only to find that all the workers at Ferrari stopped making them a long time ago and decided to make money by investing rather than making fast cars?

Most ancient societies outlawed compound interest at one point or another. They knew that making money simply by having money was ethically wrong. What they didn't know or say is that it is also, on aggregate, mathematically impossible.

Are your compounding forecasts both inflation-adjusted and tax-adjusted? Depending on your investment strategy and discipline how does this play into your $1 saved scenario? Also, you only look at investment options. How about considering index universal life insurance as a starting point with it's inherent savings discipline, tax savings compounding effects, flexibility and protection against no-losses? It's about how much money you can use during retirement. Further, over a period of time, the market will always go down so to me it seems better to forgo the possible 20% returns in good times to insure you don't lose 40% in bad times. Annualized returns will therefore be higher because of this.

Oh wait, I did. Unfortunately, life happens. People lose jobs, have medical problems, other financial hardships. While great in theory, if it were really this easy, wouldn't everyone be a millionaire?

I lost a job during the recession, so no savings for me during that time. In fact my savings went down, I had to dip into them and sold some stock at a significant loss. Sure, I'd be back to even now if I held but that wasn't a practical option.

So while this is excellent advice, its merely advice, its not the surefire way to riches articles like this make it out to be. It just takes a few unforseen events to throw this strategy into complete disarray.

What may seem so simple to you - 50 year old American males exposed to financial basics at a very young age - is not as easy to pick up when you are a first generation 25 yr old trying to figure out what the heck is going on. Access to that knowledge is not readily available (and I'm sure there's a reason for that too).

The concept of saving money is simple, but to effectively save money for your retirement and unexpected expenses while providing for a family and living your life (enjoying youth that will not always be there) is not. that. simple. You have to find ways to maximize your investments, which is not a piece of cake. Maybe for you, but not for me.

1. Simple math tells us that–as a group–we must earn exactly the market’s returns; for each investment dollar that is outperforming the market, there must be another dollar that is underperforming.

When you minus out transaction costs and brokerage fees, the odds are you will lose money trying to pick stocks.

2. Unless your company is matching more than 4-6% of your contribution, you will lose money in a Fidelity offered 401K plan compared to a market index fund. And even with the match you may still not beat it depending on how you allocate your picks.

3. Ignore stock picking newsletters with headlines like:

5 Cold Stocks Heating Up

5 Stocks with a Bright Future

These Are the Market’s 10 Best Stocks

I call them investing pornography - you can't look away, be somewhat intrigued, and they make the purveyor a lot of money.

The fact that several of you are doubtful that the concept of saving money is not that simple is the main reason why an article like this is needed. I am a 52 year old female who was not exposed to any more financial education than anyone else of my generation and have made almost every basic mistake that can be made. To say that we had access to financial basics and it is now not readily available is ridiculous in this age of the internet.

The reason we can see this concept is because we have been through the things that a 25 year old is facing and the things that they fear facing. We also understand the concept of need vs want better than most young people as well and that comes with life experience.

I have 4 daughters, all in their 20's, and convincing them that living without all of the things they think they need is difficult. I remind them that my father drove me to my first job in a truck while I was wrapped in a big comforter because the mud came up through the floorboards when it rained on our gravel road. While a cell phone, iPod, etc., are wonderful things to have, they are not necessities in life and saving for retirement should be a priority before these items.

There are many people living day to day trying to make ends meet who truly cannot save for retirement at this time. But there are also a lot of young people who need to realize that putting aside some of their wants now and putting that money toward retirement could be the best thing they ever did. Those of us in our 50's can look back and appreciate how simple it can be, for those in their 20's and 30's, it takes hard sacrifices and a little faith in the advice of those who have been there.

Housing might not be a great investment when it is owner occupied, but rental properties are a great way to build wealth. You use the banks money to buy the house and make money off the rent. In 15 years the building is paid off and all that rent is then a huge income that is not subject to Social Security--12.4%. Even if you only get the purchase power of your original money back, you are getting all that money that was the banks to begin with--not your own money. Duplex's and apartment cash flow a lot better than single family homes. If a housing crash happens it doesn't matter, because you are still getting the same amount of rent so the value of the property is irrelevant. If everything goes to hell and money isn't worth the paper it is printed on, you still own a physical asset that cannot just disapeer overnight like a pension (Detroit city workers) or a corrupt company (Enron) or a market crash.

The area I live you could buy an acre of farm land for $50 in 1970, now it is going for about $8,500 per acre--that's a 170 banger. Farmland has doubled in value in the last 5 years alone, so who says there is no money in real estate?

I would be willing to bet that I could get as good of a percentage return on my money in real estate as anybody investing in stocks over a long time frame.

I've always said that the difference between SAVING and INVESTING is far greater than the difference between SPENDING and SAVING. People often confuse SAVING and INVESTING in the same context but they are world's apart.

I would add to this as well. In addition to the time component of investing early, there's also the wisdom component. When I started investing at age 16 ($500 in MSFT in 1997), I thought all I had to do was listen to "experts" on CNBC. 16 years later, I feel far more confident in my own long-term investing and research strategies (with Foolish results to back it up) and have the benefits of learning from my newbie investor mistakes when I was playing with far less money.

<<What may seem so simple to you - 50 year old American males exposed to financial basics at a very young age - is not as easy to pick up when you are a first generation 25 yr old trying to figure out what the heck is going on. Access to that knowledge is not readily available (and I'm sure there's a reason for that too).>>

Almost everything you need to know about investing can be learned on yahoo finance. The difficult part is that most people can't tell when their getting knowledge from when their being sold a product. As is evident by the number of people on here complaining that their financial advisor has failed to net them the 8% return the article suggests they should get.

If you're paying a financial advisor to handle your money, you have already lost.

I don't often comment on articles, but here goes. This is a great article. Print it and give it to others. I was that 22 year old who came from a family that didn't talk about money. I didn't know anything about investing. I knew someone who did, and I asked. I read and researched. I understood spending less than I made. I spent a year ready to invest without doing anything because I didn’t know what to do. Then I started in the mid 90s. I was a genius. Then reality hit. I did dumb things. I learned. I suffered real losses when companies went away. I diversified. I agree with the comments that you can't say any one class or asset type will win. The rules of the game will change. Will social security give me a dime? Probably not. Do I have a pension? No. So I make my own.

It is 20 years later. I am not rich. But I am diversified: Asset types. Account types. All by investing a little at a time, but doing so frequently. A foundation of index funds. And so on.

Yes, married and with teen kids it is harder. I have cut back investing. But I set real goals. In the aggregate, I try to invest more than I pay in taxes-over my lifetime. That is hard, it requires prioritization. I bought half the house the bank said I could afford. I pick a vacation with my family over a new car this year. I pick funding my 401k up to the match over having the bathroom redone. Another goal-give away as much as I pay in social security. I want to donate as much to things I believe in as I am forced to donate to the government.

Is TMF perfect? No, I get annoyed by the continuous marketing. But they do recommend some really good companies. They write interesting articles. They are transparent. I don't spend hours obsessing over every detail-I would rather play basketball with my kids. I value persistence over perfection. My message here: anyone can do it. Your circumstances will dictate how little you start with, how much of a balance you strike between the now and the future. And finally, as someone else said-I try to get this message out to younger people and be the person I had that was my sounding board 20 years ago.

@ grusilag... E=mc^2 although this is not the full equation, is an exponential function... The full one is E^2=(mc^2)^2 + (pc)^2.

Also for everyone to learn more that can't find any info, MF is awesome, look under How to invest at the top of this page, Investopedia is awesome, look up companies you like, and apply these fundamentals... it's not that hard to learn.

Great advice, Morgan. But there is one problem with starting saving and investing when young. You get so indoctrinated into the culture of saving for later years that by the time you reach retirement age and you can (and should) start enjoying the fruits of your saving/investing, you just can't bring yourself to spend the money. You keep saving for the rainy day that never comes. And then you die. By that time you have accumulated a sizeable nest egg which you never got to crack. It all goes to your heirs or to the government.

My mother came from Europe where she she went through 6 Years of German occupation, then 13 years of Russian "liberation." During that time saving became a religion to her. We saved everything because "it might not be there tomorrow."

We immigrated to the United States and my mother started saving as much as she could from her paycheck. Then when she was able, she started investing her savings. Our vacations were occasional trips to Coney Island. Every once in a blue moon we went away for a week to some cottage owned by a friend or acquaintance. According to my mother, going to a resort or staying in a motel for a vacation was a waste of money. I did not vacation in a resort until I got married and had a family of my own.

All that time her nest egg kept growing. Even after I moved out and she retired, she could not bring herself to go to a resort, go on a cruise, to take a proper vacation. It was always "What if the market collapses" or "what if the house burns down and I have to rebuild", etc., etc., etc. She died at the age of 85, never having enjoyed the money she saved over all those years. Yes, I inherited her estate but deep down, I feel guilty about it and sad that she didn't get to enjoy it.

So, don't make saving/investing the be-all and end-all of your life. Spend some of your savings and have fun every once in a while. Why should your kids inherited all? Let them discover the joy of saving on their own.

Something I would like all of you young people to look at are the proposals that have been made for changing social security benefits. At the United States Social security website, search for "Proposals Affecting Trust Fund Solvency". Here there is a list by date of many proposals. I think of particualr interest are the proposals of the

National Commission on Fiscal Responsibility and Reform, also called the Simpson-Bowles commission. Choose from the list of dates Dec. 1, 2010. The discussion is complicated, but Table B2 is pretty straight forward and shows the effect on workers of ages and levels of earnings of these proposals. Also, please don't forget about social security benefits other than retirement such as disability and survivor protection.

As a millenial still in college, I do have a small nest egg and continue to actively invest in the markets. The only problem I have with this assumption is that it does not seem to take inflation or rising interest rates into account. A dollar today obviously does not equal the value of a dollar tomorrow.

It also does not make sense to save 10 percent of your income to earn a 6 percent return when Sallie Mae charges interest rates much higher than that and owns your soul in the process.

I think what is unique about millenials is that some of us really want to save, but simply do not have the means to do so. The tools are very available, but capital is harder to find.

Valuations are higher than what theyve been in the past. Anyone investing now should realize the implied return based on todays valuation. Lets say the market returns its long term average return on equity of 12%. Lets say it reinvests 40% of that(consistent with about 4.8% gdp growth) and returns the other 60% through dividends and buybacks. Essentially you have a return of 5% through book value growth and about 2.9% return from the dividends and buybacks(7/2.4 p/b ratio) so a bominal return of about 7.9%. If you believe gdp can grow at 6% and corporations will retain half of their earnings, then that number will be 8.5%

If anyone is till reading this far into the thread... one additional perspective. At one point I had $202,000 in my 401-k and a nice little chart of expected contributions and results going into the future. Then came 9/11/01. I failed to adjust my positions ( something to do with being a silly SOB and "at sea" with neither time nor ready means to make changes. Pretty soon it was down to $142 k. I built it up to $156 k, but then was laid off from a job I had held over 20 years... and it was 14 months before I found another... at about 60% of my former pay. OK, plenty time to fix that too, right? WRONG. You see, I was 62 at lay off ( yeah, ok, I get it, Geezer for sure!)...lasted a year at the next job and then had no choice but to retire.

So, my friends, do not wait to start saving. As the (ominous background music rising) world spins on... this could happen to you. Maybe even learn a little Chinese...

Good article with good advice. I did quit smoking twenty years ago from a two pack a day habit, so my savings were slightly more per year of about $2,190/year times 20 years = $43,800. While I did not buy a Ferrari, I was able to max out my 401k, IRA & for a few years, a defined benefit plan. One of my favorite investments has been 15,000 shares of Celdex (CLDX) purchased for less than $3 per share, now worth over $350,000, enough to purchase a Ferarri (if I wanted one).

The replacement of a bad habit (smoking) in favor of investing in retirement funding is probably one of the best piecesof advice I have received. It's never too late to start and it doesn't seem like a lot when you begin ($6/day) but it adds up over time and can grow into a nice next egg over time.

Well, typically I wouldn't reveal my age for fear of "guilt by association", of the tendencies and idiocy of much of my generation. At a born-yesterday age of legal in Vegas, I find it slightly appalling to see people in my age range commenting about not knowing what to do, where to start, and already planning to start pouring money into a 401k after just learning about it. Meanwhile, alternative investment options don't seem to be understood or comprehended fully as of yet. But it sounds like they've been saving for a while. I in no way mean to offend anyone, and quite frankly, if I have, I won't lose any sleep. But I'd like to call to your attention that while yes, time is a big friend, and marketing strategies try to persuade you to "act now", for fear of losing potential profit...

But stop and really think about it; you're about to invest money, equal to however many hours of work (time invested to earn money), but you're jumping the gun, wanting to play before you understand the game. And you're willing to place bets on your first round? Time is your friend here too. You may be feeling that you've missed many years of opportunity, but the solution is not to go in blindly, to capitalize on time. Time means nothing if you don't invest wisely (errm, sorry; Foolishly). You could invest a million dollars at age 10 and be broke before 11, hypothetically speaking. The logical conclusion to this failure; despite the child being only ten with time on his/her side, and having an unrealistic sum of capital, is assumed to be lack of understanding (I would assume, that that is what you all would assume as well /tongue twister). You simply need to have a fair understanding before you jump in, or you're setting yourself up to potentially fail big time, and lose those savings that you sacrificed for.

Well, I can assure you; all the information you need is out there (13 steps article posted above being an awesome place to start), you should invest some time into understanding investing, and figuring out what suites your needs. However, no one is going to spoon feed you readily available information, that can easily be found on any of your favourite search engines.

If you're willing to spend countless hours working for this money, and you're thinking 45 years ahead to retirement already (kudos to you, that shows you're already ahead of most of our generation), you should be smart enough to stop, and realize even a year spent learning about investing, is simply another form of investing. You're investing enough time into learning, retaining knowledge, understanding, and fully comprehending what you want to get into. You're investing in obtaining the knowledge to actually succeed. It's your savings, it's your future, and I don't think "buy and hope", will be getting you that Ferrari. You should spend enough time learning about the stock market, to be able to review data, and draw your own conclusion on whether a stock will rise or drop. Of course, no one is perfect, but when it comes down to either losing all your savings, or retiring comfortably, is it not worth your time to do extensive research? I wouldn't recommend going in blindly unless you have some serious expendable income that you're willing to part with in favour of a learning experience...

My last note, is that people also seem to obsess with annual returns, lifelong averages, etc. I'm not saying that this stuff doesn't matter, it obviously does, but from my perspective, it seems much more promising to really look out for those next big companies. I mean, as a child I remember recognizing the convenience of Youtube on an internet when it was challenging to find a place to host or upload a file any larger than a low resolution JPEG image (or so it seemed to me), for free. And suddenly this website is offering free hosting, with streaming videos?! I showed it off to plenty of people who initially dismissed it due to it's miniscule amount of content (however, you could find many classic viral videos quite early on, IIRC). Anyway, I was far too young (I think, I don't even remember when YT started to be honest), to understand capitalizing on the company. However, my point is, that in modern times, people are quite keen at recognizing what does and doesn't have demand, and how large the target market is/will be, especially when the company is related to their interests (such as gamer-investors capitalizing on TTWO, with GTA V releasing soon, as an example). Simply recognizing a few small start ups that will take off and become the next five year fad could possibly be enough to comfortably pad your nest egg. Anywhere you go, you probably see or hear about; "buying in on eBay, Microsoft, McD's, whatever, at such and such a time would have resulted in such and such insane profit by today". Well, the trick is figuring out for yourself which companies are likely to get huge. You could ignore index funds entirely (not a suggestion, FYI), and just go in on companies that you see real potential in, while shares are at rock bottom. If you've done your homework, have good intuition, and maybe a bit of luck, you could most likely quit your day job after a handful of really good picks. Then all you have left to do is start your own investing firm, and website.

Well, keep in mind that I'd be willing to bet I'm less educated than 99% of the users on this wonderful site, so take from it what you will, but I stand by my key points of; learn BEFORE you invest (even if it means losing out on more time, you can probably afford the time easier than replacing your savings), and look for that needle in a haystack, it will probably show up right under your nose one day, whether you're a model train enthusiast who hears about a new model train company that you're willing to stand behind, or maybe you're an oil rig worker getting laid off because this new company is starting to get all the work, and they're developing a good reputation. If this new company stands a threat to your presumably well established company that's been around for decades, then maybe it's time to consider the old saying "If you can't beat 'em...", but instead of joining them, maybe you invest into them before share price soars, they dominate the market and you cash in shortly after a really good price peak. You've now gained a whole bunch of profit that you can use to re-invest if you so desire. Diversify your portfolio, put money in your TFSA/IRA, bonds, tube sock behind the dryer, etc.

Take it with a grain of salt, but I do urge the younger people to seriously educate themselves, before getting their feet wet. Or try out one of the virtual paper trading sims. See how much money you can make off 100K, with no actual risk or cost to you, while still getting to "trade", at current real life prices. Anyway, best of luck to you all, may your portfolio's grow exponentially.

The actual broad market return is closer to 9%. The S&P 500 is just the 500 largest companies but according to Nobel Laurette Harry Markowitz a properly diversified portfolio should also include small stocks, emerging markets, etc. So the S&P 500 return of 6.6% is low and misleading.

I believe all Americans should build a paying asset that is not counted on stocks, and there are few solutions to that, I'm doing one right these days and I hope more people will find a way to do it like I'm doing. If anyone wants to find out, I'll be more than happy to share.

A similar article changed my life at the end of the 80s. As an Austrian (middle of Europe), I should have been pretty sure to receive a nice governmental pension at the end of my working life. Without worries and at about 80% of my last income. That was, when I was in my early twenties. I was working for an US company back then - NCR and being in sales and marketing for the banking industry, I used to read US magazines relevant to this industry.

I remember well, when they described, in a very similar way, how little to save every month would be enough for the retirement. They wrote never to rely on anybody else but yourself to save for later ages. Not to rely on your employer (could go bankrupt), not to rely on your government (could change legal conditions), not to rely on your husband/wife (could be devorced), not to rely on your kids.... and so on.

This really got me. And I started thinking.

And I started saving. As at that time, funds or equities were loaded with such high fees and information was scarce, I decided to save via a life insurance. It might not be the best thing, but it was the best I could find at the age of 24.

Later I started investing into the stock market.

Now, that I am almost 48 I can only say thank you thank you thank you to whoever wrote that article, decades ago.

Now, the goverment changed the law on retirement. I will go much later, than I was made to expect in my early twenties and the pension paid out will be much much lower, than I was told then. In stead of paying 80% of the last 10 years income, they will pay 50-60% of the average income of the whole life time. If that even will be true in 20 years...

I am divorced and no husband or sugar daddy will take care of my finances (brrrrrrrr - I would not want that).

My kids need education, they will get all that is necessary, but it will be out of the question, that they should care for my retirement.

So - my little savings grew over the time and still have almost 20 years to keep on growing. Housing will be have to paid, a new car once in a while (no Ferrari :-) ).

Hobbies and healthcare should be considered.

So as this is the 77th comment on that I am not sure, if anybody will be reading it. But if you do, keep on saving, trust this reccomendation! I did and it was the right thing to do!

@Marc014 - The essence of what the authors mean when they say "you cannot lose" is that historically, stocks have a tendency to rise over time. If you stay invested long enough, you should be able to ride out any temporary dips, such as the Internet bubble pop in 2000 and the credit/financial crisis in 2008. What they're *not* saying is "how long is long-term" - you probably won't find any answer to that question. Most estimate it to be about 30 years, but that may or may not hold for the future.

Onto your other question - how does one protect themselves from retiring immediately after a market crash? Well, obviously nobody can predict this happening, but there are measures you can take to reduce its effect. Reducing your exposure to stocks as you grow older is the key.

How?

Option 1.) Buying a Target Date Retirement fund - it will do this automatically for you (for a few extra points in fees - IMO worth it if you don't have any interest in rebalancing and checking your allocation. I put my mom in these kind of funds).

Option 2.) DIY - take some money off the table as you're getting closer to retirement. I like to imagine 3 buckets of money - an amount I'll need in the next 2-3 years (cash), the next 3-5 years (bonds), and 5+ years (mix of stocks and bonds). It's not a perfect system, but it's a framework for still keeping invested *during* retirement. There's a chance you'll live 30+ years past your retirement date, so you'll want your money to continue keeping up with inflation.

For further information, Google "target retirement glide path" and you'll see how you could make your own Target Retirement fund by mimicking how a "real" one does it.

The point is simple.. we expect our money to compound but nothing that we buy with it - food, houses, cars, or iPhones - compounds for any significant period of time (like 150 yrs). (I keep qualifying because given a short enough time span, many forms of growth can be represented using exponential models but not when the time span becomes longer - some things in nature that exhibit exponential growth for short periods of time are amoebas growing in a petri dish, or cancer cells in a human body - both stop growing at that rate when they've quickly consumed the physical resources that cannot keep up with their exponential growth).

This means that, by definition, not everyone can take advantage of Morgan's wonderful advice. Which is why the rejoinder of "where is your Ferrari?" isn't just a witty quip, its a literal counterpoint to anyone that says just invest and take advantage of the market doing the heavy lifting for you.

It may work on an individual level, which is why you'll find some people saying that investing has worked for them, but it cannot work on the aggregate, which is why you find most people saying that they didn't manage to become rich by investing. They then blame themselves for not investing properly or wisely or being too rash or not having enough knowledge or whatever instead of taking a step back and understanding the implications of, not just expecting compounding growth, but the simple point that if everyone expected to save wealth faster than they made wealth (which is the point of investing) then the only way to make that work on the aggregate is to artifically inflate the thing that everyone wants to save - i.e. money.

"The only people who believe you can have compound growth in a finite world are either mad men or economists." - Kenneth Boulding

When I was 20 I took this article's advice, I invested in two savings schemes putting a significant proportion of my monthly wage into two policies investing in stocks & shares. They both promised to earn me enough money in 25 years time to buy my house outright, each.

25 years later the first policy has matured. It hasn't even given me enough money to buy a family car. Maybe the two put together would buy me a nice car, but certainly not a house, and they wouldn't have any noticeable effect on my pension.

On the other hand I have a well-paid job, and I pay attention to a lot of the other posts here, so I pay regularly into my pension scheme. During a typical year I pay in about 4 times as much as the total combined current fund value of my previous saving schemes.

Maybe I'm wasting my money here too. But the message is clear : Inflation, house prices, pay rises, and career progression have all made a mockery of any savings I made early on in life. Even with compound interest.